WASHINGTON – Some financial advice is so oft-repeated that everyone takes it for granted: You shouldn't bring debt into retirement. Debit cards are safer than credit cards. Older folks should invest more conservatively. As they used to say on Seinfeld, yadda yadda yadda.
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The problem is, a lot of that is bad advice. At best it fit a bygone era; at worst it was never right and is dangerous.
Here is a list of my least favorite financial chestnuts.
- "Don't take a mortgage into retirement with you." That may have made sense when interest rates were high, but even after recent hikes mortgage rates are still close to their historic lows. Anyone who refinanced in recent years is probably paying less for that money than they will on any other loan they could get now or ever again in the future.
Instead of making extra payments to burn the mortgage early, stash those extra dollars in a retirement investment account. Invested prudently, it's hard to believe that money wouldn't earn you more than the 3 or 4% you're paying in mortgage interest - which is tax deductible, don't forget.
Having the cash on hand, instead of the paid-up mortgage, could help with retirement expenses down the road when you're not ready to sell your house but have unexpected expenses. If you think you want to stay in your house through your dotage, paying off a low-rate mortgage slowly while you bank money is a much better solution than paying it off now and finding you need a costly reverse mortgage in the future.
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- "Never borrow against your 401(k)." When you borrow money from your 401(k), of course you lose the ability to invest it profitably until you pay it back. Furthermore, if you leave your job while you have a loan outstanding, you may have to pay the money back immediately or consider it as a taxable distribution.
But consider this: The going rate on 401(k) loans is prime plus 1 percentage point, or 4.25% right now. And you pay that back to yourself. If you have some of your 401(k) invested in low-yielding bonds or guaranteed instruments and you need to borrow money for an important reason - to see you through a medical problem, for example - and you know you'll be able to keep up the payments, it may be a better deal than an unsecured loan or credit-card debt.
Not sure if it will work for you? Bankrate has a calculator that can help you do the math.
- "The older you get, the less you should have invested in the stock market." Sixty may not be the new 30, but it isn't the old 60 either. If you thought you had to withdraw all of your money on the day you retired, you'd have to keep it safe and invested in guaranteed instruments like bank certificates of deposit. If those CDs were paying 11% a year in interest, as they were in the early 1980s, there would be no need to invest in anything else.
Now, depositors are lucky when they don't have to pay the bank to hold their money. Bond yields are near historic lows and also present the risk that investors will lose value if interest rates rise while they are holding bonds. Furthermore, the average 60-year-old is told to prepare for a retirement that will last 25 or 30 years, so she has some time to invest for the long term. Even if you're 90, if you plan to leave money to heirs, you aren't investing for the short term.
With that long a time horizon, you need to keep money invested in stocks, which, over time, still outperform other investments. Large company stocks returned just a shade under 10% a year between 1970 and 2012, a period that covers several market meltdowns.
The old rule of thumb - 100 (or 120) minus your age is the percentage you should keep in stocks - is too conservative for this era.
- "A debit card is safer than a credit card." That's only true if "safer" is code for "will protect you from yourself if you're profligate." If you have the discipline to charge only what you can afford to pay off, you can't beat a credit card. You'll get incentives like cash rewards. If the number gets stolen, your issuer will make you whole. If you lose control of your debit card, your bank is probably going to make you whole, too, but your checking account could be a mess for a while. And you aren't going to hit overdraft fees with a credit card.
- "Be practical about your college major." The latest thinking on college is that you shouldn't spend a lot of money to go get a degree in communications or social work. Maybe that's true. But don't change your major to engineering if you really want to be a dancer or a kindergarten teacher. Some of the most successful business professionals studied philosophy (famed Fidelity fund manager Peter Lynch, financier George Soros, TimeWarner head Gerald Levin) or English (Mitt Romney, former Disney head Michael Eisner, National Cancer Institute head Harold Varmus).
Spend less by going to a less expensive college, and follow your bliss.